WEEKLY FOCUS:                                          09 December 2019

Major indices rose during the past week after positive economic data lifted investor sentiment which had remained subdued due to trade tensions. A rise in Procter and Gamble shares helped the staples segment of the S&P500 post a gain of 1.37% but the industrials sector lagged with a gain of 0.52% after a decline in the shares of Boeing which remains plagued by uncertainties surrounding the 737 Max airliner. Positive economic growth which has pushed equity indices to record highs remains highly dependent on trade deals, especially the one between the US and China.

The news on Tuesday that the White House would be willing to wait until after the 2020 elections to strike a deal with China as well as the threat of imposing a 100% tax on French products in retaliation to a digital service tax on US companies led to a rise in volatility (chart above). A fall in the employment rate and jobless claims to a 5 decade low on Friday lifted equity indices again. The threat of the US imposing tariffs on Chinese goods on December 15th remains a worry however.

In Europe, the DAX and CAC40 closed higher but France witnessed its most severe public sector strike since 1995 after the Macron administration announced reforms on pensions. There was political uncertainty in Germany also as the left wing Social Democratic Party which has a different fiscal policy agenda from its coalition partners will seek to renegotiate current policies to offset the negative impact of trade uncertainties. Japan also announced a fiscal stimulus package of USD 120 bn to offset the impact of a recent sales tax increase and a fall in exports due to trade tensions.

This week the US FED should keep policy unchanged during its meeting on Wednesday and the ECB should do likewise during Lagarde’s first meeting. However volatility could continue on account of trade and Brexit uncertainties.